Functions of a financial manager Key objectives of a financial manager Financial planning Assessment of investment projects Decisions on financing Operations on capital markets Financial control

Financial structure of the company Financial structure is a hierarchical system of financial responsibility centres (FRC) which define the order of financial results forming and responsibility distribution to achieve one common objective of a company.

Financial structure of the company FRC Objectives Can include Can be included into CC Expenses CC CC, PC RC Revenue RC PC MRC Profit of a business CC, RC MRC, PC PC Profit of the company PC, MRC, CC, RC PC, IC IC ROI PC, CC , IC I

Organizational approach An organizational structure is a mainly hierarchical concept of subordination of entities that collaborate and contribute to serve one common aim. (Wikipedia)

Organizational approach Functional organization

Organizational approach Functional organization Advantages Disadvantages Easier personnel management Employees fulfill their usual functions to the detriment of innovative and project work. Each employee has one clear superior Staff members are grouped by specialty No horizontal connections between departments Clear career perspectives

Organizational approach Projectized organization

Organizational approach Projectized organization Advantages Disadvantages Effective project work A project looses its “house” when it is closed Loyalty to a project Less competence in different spheres Effective communications Double functions and means Less effective resources allocation

Organizational approach Matrix organization

Organizational approach Matrix organization Advantages Disadvantages Clear project objectives Higher administr. costs Better resources control More than one superiors Better coordination Difficult to control Project team has its “house” More agreements and procedures Better vertical and horizontal distribution of the information Different priorities of functional and project managers Possible conflicts and double work

Process approach A process is an activity which transforms input into output. A business process is an activity that uses specific resources to produce a specific service or product for a particular customer.

Concept of cash flows Cash flow — the movement of cash into or out of a business, a project, or a financial product during a specified, finite period of time. 0+ Inflows — Outflows = Cash Flow

Relationship between risk & profit Nothing ventured, nothing gained Britain’s Special Air Service motto: Who dares, wins The higher profits are usually connected with the higher risk

ACCOUNTING SYSTEMS

Bookkeeping, financial & management accounting Bookkeeping is the recording of day-to-day financial transactions (purchase, sales, receipts, and payments) Financial accounting concerned with the preparation of financial statements for decision makers (stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders) Management accounting provides managers of the company with the essential internal data to direct and control the company’s activity

Financial reporting standards used in Russia Differences between RAS and IFRS RAS IFRS strict regulation of all actions, common card of accounts concepts based authorities oriented stakeholders oriented no information about associated companies reports of holdings are consolidated

Financial reporting standards used in Russia Main concepts of the IFRS: accrual basis going concern individual evaluation concept conservatism matching substance over form

FINANCIAL STATEMENTS

Annual reports What cash movements were present during the period? Cash Flow Statement What earnings does a company generate during the period? Income Statement How much material values did a company accumulated and what are the sources of forming? Balance Sheet

Net working capital NWC = CA – CL = IC – FA Represents operating liquidity available to a business Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

Cash flow statement Differences between EAT and CF: 11 EAT show economic effectiveness of sales, don’t concern payments spread in time CF shows real in- and outflows during the period 11 EAT exclude VAT CF shows VAT 11 EAT includes depreciation as a disbursement CF exclude depreciation as an outflow 11 Income statement concerns only operating activities Statement of cash flows concerns all the types of the company’s activities

FINANCIAL ANALYSIS

BASIC PRINCIPLES

Financial ratios A financial ratio is a relationship that indicates something about a firm’s activities and enables an analyst to make a comparison of a firm financial condition over time or in relation to other firms.

Financial ratios Successful financial ratio analysis: Requires only representative sample of possible ratios A financial ratio is meaningful only in comparison to some standard or tendency While comparing to another firm remember about possible differences in accounting techniques and ratios names.

Financial ratios Advantages of financial ratios: Possible to compare companies and projects of different sizes Just several ratios can provide a relatively full information about the performance of the company Show relationship between earnings, disbursements, assets, equity and liabilities Easy to calculate

Financial ratios Disadvantages of financial ratios: Strongly depend on accuracy of reports Don’t analyze absolute values of sales, profit, used capital Difficult to find a standard or a base for comparison Ratios based on annual reports don’t show the company’s performance during the year Don’t consider sudden changes on the market or inflation

Financial ratios Users of financial analysis results: Users Interest Suppliers and short-term creditors current liquidity, near-term cash-generating capacity Bond holders and holders of preferred stock Earnings, assets, cash-generating capacity over the long run, claims other investors have on the firm’s cash-flows Common stockholders and potential investors profitability and risk Management all aspects of financial analysis on both short- and long-term basis

Financial leverage ratios measure the degree to which a firm is financing its assets with fixed-charge sources of funds such as debt, preferred stock, or leases Debt ratio = Total debt/Total assets Debt-to-equity = Total debt / Total equity

Financial leverage ratios Financial leverage rule: if the rate of return on equity exceed the cost of the borrowed funds (interest rate) – the more is the share of the debt, the more is return on assets ROI>i : debt ROE if the rate of return on equity is lower than the cost of the borrowed funds – the more is the share of debt, the lower is return on assets ROI<i : debt RO

Market-based ratios measure the market’s (investor’s) assessment of the risk and performance of a firm. P/E = Market price per share / Current earnings per share P/BV = Market price per share / Book value per share

Trend analysis Steps of the trend analysis: 1. Choose a ratio 2. Choose a basic period / find industry standards 3. Find information on the previous periods 4. Draw a trend for the previous periods 5. Analyze the trend comparing to the basic period or industry standard 6. Make forecast for the future periods and draw the results at the trend

Percentage of sales forecasting method The percentage of sales forecasting method: permits a company to forecast the amount of financing it will need for a given increase of sales while sales increase, increase company’s assets and liabilities the difference between the forecasted asset increase and the forecasted current liability is equal to the total financing the company will need.

Percentage of sales forecasting method To support the sales increase the management of the company has to decide whether to (1) borrow on a short-term basis, (2) to borrow on a long-term basis, (3) sell additional common stock, or (4) cut dividends.

Types of costs Variable costs are expenses that change in proportion to the volume of production: Materials Labor Fixed costs are business expenses that are not dependent on the activities of the business: Heating Water for non-production purposes Salaries Selling & administrative expenses… Semi variable cost is an expense which contains both a fixed cost component and a variable cost component. : Electricity Communication means…

Types of costs Dependence of per unit cost on the volume of production Per unit cost, RUR Quantity, units

Cost structure A cost is the value of money that has been used up to produce something Direct costs are those for activities or services that benefit specific projects Indirect costs are those for activities or services that benefit more than one project.